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The EZ goods trade deficit widened again at the end of Q2 as imports rose and exports fell.
Imports should fall soon, but exports are also likely to soften as GDP growth in key trade partners slows.
Net trade will not prevent the incoming recession, exacerbating the impact from falling consumption.
We think the ECB will continue to buy peripheral bonds using redemptions from core countries...
...This should, we think, mean that the TPI can remain in the shadows this year.
We still believe the ECB will hike by 100bp more this year; the bund 2s10s will invert in Q1-23.
We now think it’s likely that the EU manages to fill its gas storage levels to the target 80% by November.
Storage will be drained more this winter than in the past, given lower flows, even assuming no cold snap.
This is despite rationing, which we doubt can be avoided, and will push the EZ into recession by Q4.
HICP core inflation in Germany rose further in July; it will peak in September, at just under 4%.
Energy inflation in Germany is now falling, but upside risks in gas and electricity are still substantial.
ESI sank in July, adding to the evidence of a significant slowdown in the EZ economy.
Russian gas will soon flow to Europe again, but at a severely reduced rate; a full shutdown remains likely.
The IMF estimates that Europe will be short some 50bcm gas if Russian supplies are halted, at best.
Only demand compression, via higher prices and or rationing, solves this problem; it will sting.
The ECB did not use its entire PEPP envelope and diverged from the capital key also in the APP.
Reinvestments will be used flexibly to cap spreads; rumours suggest cross-country purchases started.
Our estimates point to a maximum of €10B worth of PEPP reinvestments for BTPs; that’s not enough.
The details of the June PMIs are not pretty; we are more convinced the EZ is entering a slowdown.
We now think the EZ will be unable to avoid entering a technical recession in Q4.
This will set a weak base for next year; we forecast just 1% GDP growth in the EZ in 2023.
The SNB threw a bazooka yesterday, hiking interest rates and doing a U-turn on its approach to the CHF.
As a result, the franc saw its biggest intra-day jump vs. the euro since the Frankenshock of 2015.
We look for the Bank to hike rates again at each of this year’s two remaining meetings, before pausing.
We think the ECB’s pain threshold for BTP spreads is 300-to-350bp, much higher than in the past.
An explicit commitment to an active use of PEPP reinvestments is the most likely initial response.
BTP spreads will rise further in the near term, but Italian 10-year bonds are attractive in their own right
The Irish boost to EZ GDP growth in Q1 will have a reverse impact on growth in the second quarter.
We now expect EZ GDP growth of 0.4% quarter-on-quarter in Q2, 0.1pp lower than previously.
The risks to our forecast for a weak H2 are to the up-side, especially if the gas embargo remains elusive.
The ECB will lift its deposit rate by 25bp in July, and follow up with a 50bp hike in September.
Beyond September, we now pencil-in three 25bp hikes; in October, December and February.
The bloodbath in Italian bond markets will soon be a problem for the ECB; new tools are needed.
Industrial production in Germany rebounded in April, but a fall in Q2 as a whole is virtually guaranteed.
Rebounds in services and net trade should drive a Q2 increase in German GDP, by around 0.5%.
We think German GDP will rise by 1.4% and 1.7% in 2022 and 2023, respectively, below the consensus.
A rebound in services activity is supporting EZ GDP growth; we see softness everywhere else.
We still see EZ GDP rising by 0.5% quarter-on- quarter in Q2, before a sharp slowdown in H2.
Unemployment in the euro area is still falling, but at a slowing rate; this trend will continue in H2.
The EU finally agrees on a Russian oil embargo, but pipeline oil to Eastern Europe will keep flowing.
We now see a real risk of panic at the ECB; the deposit rate will be at zero by July.
Revised data show that Italy’s economy actually grew in Q1 while Swiss GDP beat expectations.
Volatility in inventories and net exports has thrown near-term German GDP forecasts into disarray.
We’re sticking with our assumption of 1.5% growth in 2022, which includes a technical recession in H2.
Market forecasts for German growth will fall further, but we could well have to lift ours too.
The EZ’s current account plunged to a deficit at the end of Q1, and it will likely stay there in Q2.
EZ portfolio outflows are plunging, reflecting rising economic uncertainty and market volatility.
Construction in the euro area performed solidly in Q1, but it will slow sharply in Q2.
EZ trade data show that sanctions hit trade with Russia hard, and energy imports fell in March.
Progress in imposing an oil ban has stalled, as four countries, led by Hungary, threaten to veto it...
...The risk to our assumption that the EU will push ahead with a ban on gas soon, is towards no ban.
The medium-term outlook for EZ equities has improved significantly in the past 12 months...
...But earnings expectations have to fall further in the near term, weighing on prices over the summer.
EZ manufacturing will slow sharply in Q2; core inflation pressures in France have intensified.
Italy will probably avoid entering a technical recession in Q2, as services activity rebounds strongly...
...But we now expect an EU ban on gas imports from Russia, which will weigh on growth in H2.
Our forecasts for Spain are unchanged from March as recent developments offset each other.
We still think German GDP growth will pick up a bit in Q2, as services activity improves.
But the economy probably will fall into recession in the second half of the year.
We now see full-year growth in 2022 at just 1.5-to-1.6%, with the same pace likely in 2023.
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